Prices Take a Big Tumble

The Administration's long battle to bring down the cost of living is paying off

Since 1965, prices in the U.S. economy have been heading one way. Sometimes rapidly, sometimes slowly, they went relentlessly upward. Yet last week the Labor Department reported that the economy's 17-year inflationary spiral had, for one month at least, finally been broken. During March, inflation as measured by the Consumer Price Index actually went down instead of up. This turned a trend of what economists call disinflation, or slowing price rises, into outright deflation, or falling prices.

The March figure, which showed prices declining at an annual rate of 3.3%, was the first such drop since August 1965, and the sharpest rate of decline since 1953. Skidding gasoline prices, which little more than a year ago were marching briskly upward, led the decline. They dropped 4%, one of the steepest slips ever recorded for a one-month period. As of last week, a gallon of gasoline was selling, on average, for $1.18, the lowest level since January 1980.

Other consumer items also showed healthy, though less dramatic, declines in price. After rising at a yearly pace of 7.4% in February, the cost of food and beverages dropped in March at an annual rate of 3.7%. That is bad news for cash-squeezed farmers but welcome relief for consumers battered by years of high prices at the check-out counter. Housing costs showed an equally pronounced slide, slipping at an annual rate of 3.7%, after having risen at a yearly pace of 4.9% the previous month.

While consumer prices are unlikely to continue dropping indefinitely, the March decline was not simply some statistical aberration. It came after nearly half a year of steadily sliding inflation. Instead of the vicious cycle of ever higher costs, the economy has now entered a virtuous cycle of declining inflation. Says Data Resources Chairman Otto Eckstein: "We still have not seen the full impact of declining mortgage rates turn up in the CPI figures. Consequently, I expect to see at least one or two more months of deflation this year."

In February 1981, the Reagan Administration unofficially forecast that inflation would drop to 5.7% during 1982. At the time, the projection was dismissed as outrageously optimistic. Yet that figure now seems, if anything, pessimistic. The Data Resources Inc. economic consulting firm projects that inflation this year will be no more than 3.9%, and the experts say that it could wind up still lower.

Murray Weidenbaum, the chairman of the President's Council of Economic Advisers, is more cautious. Last week he predicted a 6% inflation rate for the year as a whole. He added that the price news was "excellent" but warned that it was too early "to declare victory in this war."

Nonetheless, the Reagan Administration was happy to claim credit for the good news on inflation, which was the most concrete sign yet that the President was achieving his No. 1 economic goal of reining in runaway prices. Said Treasury Secretary Donald Regan: "We've turned the corner on inflation. It's further proof that the stage is set for economic recovery."